By James Thomson
Jerome Powell calmed Wall Street on Friday night. Now it’s Philip Lowe’s turn.
That’s the view of investment veteran Geoff Wilson, who says while an interest rate cut is unlikely to either restore the local financial market’s confidence or what he believes are supply-side problems created by the coronavirus, the Reserve Bank needs to act to support the economy and markets.
The S&P 500 was down as much as 4.1 per cent on Friday night before Federal Reserve chairman Powell released a terse, four-sentence statement 90 minutes before the closing bell. He said that while the US economy is strong, the Fed is monitoring the “evolving risks to economic activity” posed by coronavirus. “We will use our tools and act as appropriate to support the economy.”
Arguably Powell did little more than state the obvious – of course the Fed is watching closely, and of course it will act if necessary. But his intervention worked. The S&P 500 closed down less than 1 per cent for the session, and while the benchmark lost 11.5 per cent for the week, the shift in momentum was clear.
Lowe and the Reserve Bank board will have watched the chaos on global markets last week – the benchmark S&P/ASX 200 shed 9.8 per cent – and Powell’s actions closely.
While the board’s February meeting saw Lowe seemingly content to wait and see whether his prediction that the economy had reached a “gentle turning point” was correct, the intervening four weeks have seen both the coronavirus spread and confidence start to fracture.
The market is putting a 87.5 per cent chance on the RBA cutting the official cash rate form 0.75 per cent to 0.5 per cent at its meeting on Tuesday. Wilson says Lowe has little choice but to provide the market with the support it is clearly looking for.
Wilson Asset Management’s engagement program with its 85,000 retail investors takes it across the country; on Friday, Wilson took a day out of a week’s holiday on the Sunshine Coast to meet with about 300 investors in Noosa.
He says the mood was extremely nervous, as investors who have been forced up the risk curve by falling interest rates and rising asset prices confront the reality that the earnings expansion that had been priced into equities may not eventuate.
Wilson’s message was that the WAM funds have started increasing cash levels at the start of February; cash as a proportion of total assets in its main listed investment company, WAM Capital, has risen from low teens to about 25 per cent over that period.
There will be opportunities eventually, but not right now, Wilson says.
“What we’re seeing unfold could create an incredible opportunity but it’s far too early now. The market is only 7 or 8 per cent off its high and there’s a lot to play out.
“The real risk is this is the start of a bear market. If the market falls another 5 to 10 per cent there’s going to be a further fracturing of confidence.”
Wilson says his portfolio managers see between 2500 and 3000 companies a year, but meetings during the February reporting season, which ended on Friday, have only served to underline how little local firms know.
“Talking to the companies, they are only getting little bits of information. Everyone’s grappling for information at the moment and no one’s in front of the curve.”
This makes this potential shock very different to the 1987 crash and the GFC, Wilson says.
He argues these were essentially financial market disasters that eventually spread to the real economy, whereas the coronavirus outbreak is disrupting the global economy, then roiling financial markets.
Wilson’s view is that while the initial impact in Australia has been on the demand side – Chinese students not starting the university year, tourism and travel falling off, foot traffic down in the nation’s malls – the bigger concern is on the supply side.
“The real worry is the potential supply chain disruptions. Global supply chains now, with just-in-time delivery, are so much more integrated than they’ve ever been,” Wilson says.
“It will only become clear over the next couple of months the impact coronavirus will have on the global economy.
“As human beings we adapt and we will adapt to this. But there could be 12 or 18 months of dislocation in the economy and that’s the really serious concern.”